Tax & ATO News Australia

The new penalty regime - A big stick over trustees and advisors?

On 5 Septebmer, I presented  at The Ninth Annual SMSF Conference, a two-day conference organised by Television Education Network Pty Ltd on SMSF Penalties titled, "Administrative directions and penalties for SMSF contraventions after 1 July 2014. The new penalty regime - A big stick over trustees and advisors?"


A copy of the paper can be accessed here



With effect from 1 July 2014, the Australian Taxation Office has new weapons in its arsenal to assist it in its role in regulating Self Managed Superannuation Funds.


SMSF Trustees and their Advisors need to be aware of this new administrative direction and penalty regime and understand that these new provisions are additional to and not in substitution of the previous regime, which is still in place. It is still possible for the Commissioner to use its pre-existing tools to deter and address SMSF non-compliance, including amongst other powers:

  • Making a SMSF non-complying for taxation purposes;
  • Applying to court for civil or criminal penalties;
  • Enforceable undertakings; and
  • Disqualifying a trustee.

The new rules are intended to provide a lower scale of consequences for less serious breaches, including:

  • Rectification Directions
  • Education Directions
  • Administrative Penalties

The Explanatory Memorandum to the 2014 Bill which introduced the new provisions explains:

Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionally high. The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

The power to give directions and impose administrative penalties for contravention for the SIS Act will provide the Regulator with additional tools, both educational and punitive, in conjunction with his existing powers. These tools will be effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach, and will support the integrity of the system. (1)


There is no doubt that the ATO needed to have sanctions available that provided for less draconian consequences for non-compliances . (2)  It is not clear, however, where the ATO will delineate between degrees of seriousness of breach. It may be that the outcome in cases with facts similar to recent cases will not change. Clear guidance from the ATO in relation to this is desperately needed.


This paper will examine the new regime, as well as potential new applications of the previous regime. It will also look at what advisors should do in the event of a penalty or other notice.


PART 1 - The new penalty regime

What it means for trustees and their advisers

The new penalty and direction regime is contained in Part 20 of the Superannuation Industry (Supervision) Act 1993 (Cth) (ss 157 to 169) (SISA)).


1. Rectification Direction

s 159 of SISA

Section 159 applies where the ATO reasonably believes a trustee, or the director of a corporate trustee has contravened a provision of SISA or the Regulations.


By written direction, the ATO can require a person to undertake a specified action to rectify the contravention within a specified time frame and require the person to provide evidence of compliance.

The ATO must have regard to:

  • Any financial detriment which might reasonably be expected to be suffered by the Fund as a result of person’s compliance with the direction;
  • The nature and seriousness of contravention;
  • Any relevant circumstances.

Section 159(5) states that the ATO must not give a Rectification Direction for the same contravention that is the subject of an enforceable undertaking via s 262A, provided circumstances are still the same.

A person must comply by the end of specified period or commit an offence of strict liability, with a penalty of 10 penalty units (3)(section 159(7)).


Because the offence is one of strict liability (4), this means that the ATO does not need to establish fault or intention on the part of the trustee. This applies to both rectification and education directions (see below). This is a deliberate feature of the changes and is designed to remove most defences and discourage careless non-compliance.


The ATO must bring criminal proceedings to establish the offence.


2. Education Direction

s 160 of SISA

Section 160 applies where the ATO reasonably believes that a trustee or the director of a corporate trustee has contravened a provision of the SISA or the Regulations.


By written direction, the ATO can require a person to undertake a specified approved course of education (see s 161) within a specified time frame and provide evidence of completion of such course.


A person must comply by the end of the specified period or commit an offence of strict liability, with a penalty of 10 penalty units.


The specified or required education courses must be provided free of charge. The ATO has the ability to approve such courses. Any incidental costs incurred by a person complying with an education direction cannot be indemnified from or paid by the fund (travel, incidental expenses).

Education and rectification directions are likely to apply at the lower end of the scale of seriousness.


Variation of Directions

By written notice, a rectification direction or an education direction can be varied by the ATO at any time – s 163

Further, a person to whom a rectification or education direction is given may request the ATO to vary that direction – s 164


Any request must state the reasons for variation.

The ATO must decide to:-

  • vary the direction per the request;
  • vary in a manner other than requested; or
  • refuse to vary the direction at all.

If no decision is made within 28 days of request, the ATO is taken to have refused to vary.


Taxation Objection

If a person is dissatisfied with the ATO’s decision to give a Direction, vary a Direction other than as requested or to refuse to vary; the person may object to this Decision in manner set out in Part IVC of Taxation Administration Act 1953 (Cth).

3. Administrative Penalty

If one of the provisions set out in table at s 166(1) are contravened by a trustee or a director of a corporate trustee, that person is liable to an administrative penalty.


Penalties are set out in penalty units in the table at s 166(1), with a penalty unit currently equating to $170 s 4AA Crimes Act 1914 (Cth).


A penalty paid by a person must not be reimbursed by the Fund.

The penalties in section 166 are as follows:


Note that failure to comply with an education direction is both an administrative penalty and an offence of strict liability.

If proceedings are (or are subsequently) commenced against person for a contravention of a civil penalty provision via Part 21 of SISA, then that person is not liable to pay the amount of the administrative penalty. Any amount paid or applied by the ATO must be refunded or applied in total or partial discharge of other tax-related liability of person. – s 168


It is also possible for multiple penalties to be applied at one time, for example there may be one-off breaches or breaches that continue across more than one financial year. Administrative penalties can be applied against each contravention and are cumulative.


Administrative penalties will also be applied in conjunction with existing penalty regime (noting the exception for existing enforceable undertakings). How the ATO will use these new powers and penalties in conjunction with ability to seek penalties from the Courts and/or to issue notices of non-compliance is as yet untested.


4. Promoter Penalties

Also introduced by the amending Act is the imposition of penalties for persons who promote illegal early release schemes.


The penalties hone in on a person who promotes a scheme that has resulted or is likely to result in a payment being made from a fund otherwise than in accordance with the payment standards in the Regulations.


A new s 68B is inserted into SISA, setting out that a person will contravene the new provision if a scheme is likely to result in a payment being made from a regulated superannuation fund other than in accordance with the payment standards. The section includes definitions of ‘promote’ and ‘scheme’ and is discussed in detail in the Explanatory Memorandum.


In accordance with the existing civil penalty provisions in Part 21, a Court may make an order that a person contravening the promoter penalty pay a penalty of up to 2,000 penalty units, ($340,000) and imprisonment not exceeding five years.


5. Do the changes create liability for advisors – directly or indirectly?

In the new sections of Part 20 there are no direct links to advisor liability.

Nonetheless, appropriate advice and care will need to be taken in advising clients in relation to all existing provisions, including to:

  • Rectify any existing contraventions
  • Ensure audits and returns are up to date and lodged
  • Seek enforceable undertakings where contraventions may take longer to rectify (i.e. across a number of financial years)
  • Seek appropriate advice where necessary from auditor and/or legal professionals

As always, there are professional indemnity risks for advisers who:

  • have advised clients incorrectly;
  • have failed to reasonably appraise them of their responsibilities in relation to existing and new provisions of the SISA;
  • fail to provide appropriate or timely advice in relation to responding to new Rectification & Education Directions and Administrative Penalties; or
  • were involved in a breach of s52 SISA covenants.

Noting also it is not beyond scope that the promoter penalties that could stretch to advisers.


Trustee administrative breaches – what must they do to avoid penalty?

The new system is as yet untested and there is still limited information from the ATO as to how they will use these rectification and education directions and how flexible they will be with requests for variation.

The role of trustees, and their advisors, is simple: comply with the SISA and regulations.

If a contravention occurs: ensure it is rectified as soon as possible. The ATO has stated it will consider the scenario for trustees who are working towards rectifying a contravention that cannot be simply rectified.

Comply with any rectification or education direction within the time periods specified.

Where possible and necessary seek timely variation of the directions if compliance within specified time periods is not possible.


Ensuring no fraud in fund

There are two potential fraud related issues that may have consequences for trustees and their advisors:

  • Third party fraudulent behavior, or theft, particularly in relation to investments of the SMSF – eg, the Trio Capital collapse;
  • The trustee and/or their advisors incorrectly keeping records with the intention of deceiving or misleading the ATO or defeating the purposes of the SIS Act – see section 307 of the SIS Act.

Either case can have drastic consequences for members, trustees and their advisors. Section 307 in particular provides an offence for fraudulently deceiving the ATO, punishable on conviction by imprisonment for a term not exceeding two years.


Third party fraud and section 55(3)

The collapse of Trio Capital has been the subject of much political point scoring, culminating in a Department of Treasury review and assessment into shortcomings in the regulatory framework (in addition to previous reports by Richard St John and the Parliamentary Joint Committee).


A critical feature of the Trio Capital collapse was the stark difference in statutory compensation mechanisms between superannuation funds regulated by APRA (under Part 23 of the SIS Act), compared with SMSFs, which unlike APRA funds, are ineligible for compensation in the event of theft or fraud.


The Treasury Report reached the following conclusions, amongst others:

  • Certain financial planners and advisors played a critical role in the Trio case, particularly in relation to advising SMSF trustees to invest;
  • In doing so they may not have put their clients first or given adequate advice as to risk;
  • APRA and ASIC carried out their roles and responsibilities appropriately;
  • Some SMSF trustees had an insufficient understanding and knowledge of the risks pertaining to their investments; and
  • Inadequate financial advice may have been a contributing factor.

Enforcement action has been taken against individuals associated with the Trio Capital fraud, and investigation into others is continuing (as of April 2013).


The language used by Treasury, possibly deliberately, appears to directly reference section 52 of the SIS Act, particularly the covenants in s52(2)(b) and (f) by the trustee of a superannuation entity:

  • To exercise in all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise…
  • To formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity, including but not limited to the risk involved in … the entity’s investment.

While section 52 is directed at contraventions of covenants by trustees, section 55, which deals with the consequences of contraventions of a covenant, is clearly wide enough to encompass contraventions that result from the involvement of a third party advisor. Section 55(3) provides:

  • A person who suffers loss or damage as a result of conduct of another person that was engaged in contravention of subsection (1) may recover the amount of the loss or damage by action against that person or against any person involved in the contravention. (emphasis added)

“Involved” was defined in section 17 until 2001 to include people who have aided, abetted, counseled or procured the contravention. The section was repealed only to standardize the definition with a similar definition in the Criminal Code (5). Accordingly, the meaning of “any person involved in the contravention” in section 55(3) is certainly wide enough to encompass advisors who encourage SMSF trustees to undertake dubious investments.


Until now, members of super funds appear to have only brought claims for compensation under section 55(3) against trustees, and only in one case has the trustee been of a SMSF (6). Nevertheless, it is likely that this provision will be used more frequently in future to claim against advisors who have caused loss or damage to a SMSF.


In addition, SMSF trustees have their usual rights in tort and contract to claim damages against advisors.

There is one important practical issue in relation to claims for compensation – most professional indemnity policies will exclude coverage when an allegation of fraud is raised. This exclusion may be limited to proved fraud, but policies do exist that exclude allegations of fraud, including fraud by parties other than the insured advisor.


In situations such as Trio Capital, where fraud was involved (albeit not the fraud of the SMSF’s advisor, or even Trio Capital itself, but of the ultimate managed investment schemes in which Trio Capital invested), there is a real risk that the advisor’s insurers will deny coverage to the advisor. Whether the insurer is correct to do so is another matter, however, it rapidly becomes too costly to sue firstly the advisor and then the advisor’s insurer in order to ultimately obtain compensation.


Defences to claims for compensation under section 55(3)

There are a number of defences to section 55(3) claims in the SIS Act.

Section 323 provides defences that mirror the common law: reasonable mistake, reasonable reliance on another person, actions of another person.


Section 55(5) relevantly provides a defence in relation to loss or damage suffered as a result of the making of an investment, if the defendant establishes that the investment was made in accordance with an investment strategy. This recognises the significant onus on trustees and advisors to ensure that the SMSF’s investment strategy is followed. Furthermore the covenant relating to investment strategies in section 52(2)(f) must be observed, including:

  • The risk of the investment
  • Diversification
  • Liquidity
  • Ability to discharge existing and prospective liabilities.

Too often investment strategies are seen a mere formality and not an essential part of SMSF advice. This is particularly so with relation to the geared SMSF property investment market, which is now maturing. If there is a downturn in this property sector, the fallout will be interesting.

Part 2 – what happens next

Variation of Rectification or Education Directions

If a trustee is dissatisfied with a rectification or education direction, and wishes to challenge it, the trustee may do so by written notice, seeking that the ATO vary the direction – s164.


The trustee must make apply to vary the direction before the date by which they are required to comply with the direction

Any request must state the reasons for variation.

The ATO must decide to:-

  • vary the direction per the request;
  • vary in a manner other than requested; or
  • refuse to vary the direction at all.

If no decision is made within 28 days of request, the ATO is taken to have refused to vary.

The variation request and any subsequent objection (see below) will not delay the operation of the strict liability provisions for failure to comply with either the education or rectification direction.


Administrative penalties

The administrative penalties for contraventions set out in section 166 operate differently from the strict liability offences for failure to comply with the education or rectification directions.

The ATO does not need to convince a court of the elements of the offence (as it would for the above offences, failure to comply with an enforceable undertaking and the civil and criminal penalty provisions). Instead, the ATO can simplify notify the trustee of the penalty and then recover the penalty in the same way as any other tax debt (7).


Liability of individual trustees v directors of corporate trustees

Directors of corporate trustee are jointly and severally liable for administrative penalties. – s 169. On the otherhand, individual trustees are each liable for the full penalty. In addition, individual directors and trustee can be personally liable for breaches made in their personal specific capacity (for example, a failure to sign a trustee declaration in contravention of s104A(2)).

Is it negligent therefore not to advise individual trustees to incorporate?


Taxation Objections and appeals

A SMSF trustee may object under Part IVC of Taxation Administration Act 1953 (Cth) to the following new provisions:

  • Administrative penalties
  • Rectification or education directions
  • Decisions of the ATO to refuse to vary rectification or education directions

The exercise of the ATO’s discretion under s42A(5) of the SISA to make a fund non-complying, continues to be a reviewable taxation decision under Part IVC, as does excess concessional contributions tax determinations.

The Part IVC objection process includes statutory requirements for the ATO to decide the objection (8) and in the event of an unfavourable decision to appeal that decision either to the Administrative Appeals Tribunal (AAT) or the Federal Court.

Prior to the new provisions, the AAT in particular has expressed in virtually every decision the primacy of the objects of the legislation over perceptions of harshness.

“While tragic, the present circumstances are not those in which a discretion ought to be exercised consistently with the principles governing exercise of discretionary powers.

To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts …” (9)

In doing so, the AAT has followed the judgments of the Federal Court, including the following general statement of position from Logan J:

“…in return for regulation found in the SIS Act, particular taxation benefits are given to the Trustee of a superannuation fund and its members.

It is a privilege. It is a privilege that should not be abused….” (10)


The new powers will give the AAT greater options to direct the ATO to substitute lesser sanctions, in situations where the AAT forms the view that the ATO has been excessively harsh.

It will be some time before the degrees of seriousness are fully explored by the ATO and the AAT. No doubt there will be future cases where reasonable minds will differ as to the whether a particular contravention is so serious as to warrant a determination that the funds should lose its complying status. It is also likely that the ATO will at some point get it wrong. The welcome aspect of these changes is that the AAT can now overrule the ATO without detracting from the broader objects of the legislation.


(1)  Explanatory Memorandum to Taxation and Superannuation Laws Amendment (2014 Measures No 1) Bill 2014, para 2.8 

(2)  For example Shail Superannuation Fund [2011] AATA 940 and Triway [2011] AATA 302 

(3)  A penalty unit is currently $170
(4)  Section 6.1 of the Criminal Code
(5)  EM of No 31 of 2001
(6) Dunstone v Irving [2000] VSC 488, where one trustee / member sued the other.

(7)  See Section 298 of the Taxation Administration Act 1953. 

(8)  Section 14ZY
(9)  Triway [2011] AATA 302

(10) DFCT v Fitzgeralds (2007) 2 ATC 5105

Posted in: Tax & ATO News Australia at 26 September 14

ATO still targeting discretionary trust partnerships

Following its release of Taxpayer Alert 2013/3 in late 2013, the ATO has just published draft Practical Guidelines on the allocation of profits from a professional firm. These guidelines are designed to explain how the ATO will assess tax compliance risks in relation to professional firms carried on through partnerships, trusts or companies.


TA 2013/3 flagged concerns the ATO had about the perceived trend of professional firms restructuring from the traditional partnerships of individuals to new structures where the trustees of discretionary and unit trusts where the partners, and principals of the firm (individual professional practitioners) were one of a range of beneficiaries. In particular, TA 2013/3 identified three key issues the ATO would be investigating:

  • Where the arrangement was not effective in alienating the individual professional practitioner’s income because the structure did not reflect the practical reality of the business;
  • Where CGT and other tax obligations have arisen through the sale of business as part of the restructure, but have not been recognised or fulfilled; and
  • Whether the anti-avoidance rules of Part IVA might apply to the restructuring scheme.

This last point was the object of considerable concern in the industry. In November 2013, when TA 2013/3 was released, I wrote about the difficulties the ATO would have in arguing that the discretionary trust partnerships were a tax avoidance scheme. Until the ATO has the chance to test its Part IVA argument in court, my comments stand.


The ATO has now released draft Practical Guidelines on the Part IVA issue, outlining how it envisages the general anti-avoidance rules would apply to the structures in question. In particular, the ATO considers that Part IVA might apply if:

  • The level of income received by an individual professional practitioner does not reflect their contribution to the business;
  • Tax paid by the individual professional practitioner or their associated entities is less than what would have been paid if the principal was an individual trustee;
  • The individual professional practitioner is in substance being remunerated through other arrangements;
  • The structure does not provide the individual professional practitioner with other advantages, such as limited liability or asset protection.

There are a number of issues with this position. Firstly, as I highlighted in November 2013, it is not a given that tax paid under a trust partnership would necessarily be less than what would be due if the partners were individuals. Secondly, it is difficult to imagine a trust structure that does not provide limited liability or asset protection advantages. In pursuing these arguments, the ATO may therefore be wasting considerable time and resources.


The Practical Guidelines also provides factors the ATO will consider in making risk assessment and audit decisions. Taxpayers will be considered low risk (and therefore not subject to compliance action, although it would be inadvisable to take the ATO’s word on this) if they meet one of the following guidelines:

  • The individual professional practitioner receives an appropriate level of income for their services, determined by reference to the remuneration paid to the highest band of professional employees of the firm, as well as industry benchmarks and other reference points;
  • 50% of the income to which the individual professional practitioner and their associated entities are entitled is assessable in the hands of the individual professional practitioner;
  • The individual professional practitioner and their associated entities have an effective tax rate of at least 30% on the income received from the firm.

Taxpayers who do not meet any of these guidelines will be considered high risk, and may be the subject of investigation. While this does not mean the structure is necessarily an avoidance scheme, taxpayers who are concerned that they may not meet these guidelines should seek professional advice.

Links to TA 2013/3 and Practical Guidelines: 

TA 2013/3 - Purported alienation of income through discretionary trust partners 

Practical Guidelines - ATO risk assessment factors for remuneration of IPPs 

Posted in: Tax & ATO News Australia at 18 September 14

A Limited Recourse Borrowing Arrangement entered into by a SMSF with a related party at a low (nil) interest rate

The ATO has recently issued a Private Binding Ruling (‘Ruling’) in relation to a Limited Recourse Borrowing Arrangement (‘LRBA’) entered into by a self managed superannuation fund (‘SMSF’) with a related party and a low (nil) interest rate.

The Ruling covers a situation where an SMSF is borrowing money from a related party (a Family Trust). The SMSF and the Family Trust have the same Corporate Trustee and the same Directors. The Directors are the Members of the SMSF.

The Family Trust is lending money to the SMSF at a rate of nil interest, and is to be repaid as a single lump sum at the end of the loan term (which is not specified).

The concern with this new Ruling is that it reverses previously held views in relation to the use of LRBA in related party circumstances and the use of low or nil interest rates.

The ATO now states that the use of a nil interest rate loan with a related party will result in the income derived by the SMSF being classed as non-arm’s length income of the SMSF per s 295-550 of the Income Tax Assessment Act 1997 (‘ITAA97’) and taxed at the highest marginal rate.


Previous Position

The NTLG Superannuation Technical sub-group has previously indicated that a nil interest rate LRBA did comply with the relevant SIS requirements and that the essential feature was in fact repayment (and not necessarily interest repayments).

The SIS Act itself does not require interest repayments, merely using the words ‘...the RSF trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest’ (s 67A Superannuation Industry (Supervision) Act 1993, emphasis added).

A number of previous Private Binding Rulings have sought confirmation from the ATO on the use of LRBAs with a nil interest rate, asking whether such an arrangement would be treated as either a contribution to the SMSF or as non-arm’s length income for the SMSF.


New Position

The ATO now states that in a scenario where an LRBA is conducted with a related party and at nil interest, any income derived by the SMSF will be treated as non-arm’s length income and taxed at the highest marginal rate.

In its Ruling the ATO considers the factors of:-

  1. Fixed entitlement to income;
  2. The definition of ‘scheme’;
  3. Not dealing at arm’s length; and
  4. The fact that the amount of income generated by the SMSF is greater than would be expected if dealt at arm’s length.

1. Fixed entitlement to income

As a bare trust arrangement, the SMSF holds a fixed entitlement to income; s 295-550(5).


2. Definition of ‘scheme’

The Ruling refers to the definition of scheme in the ITAA97 at s 995-1(1) and means any arrangement, or any scheme, plan, proposal, action, course of action or course of conduct.

The ATO holds that the case in question ‘...involves the series of steps undertaken by the parties that results in the Fund’s acquisition of its fixed entitlement to the income...and any derivation of income by the Fund through holding that entitlement.’

The income derived through holding the entitlement is derived under a scheme.


3. Not dealing at arm’s length

The ATO considers it is clear that the parties in this case are not at arm’s length, as:

  • The directors and shareholders of the private company, which is both the corporate trustee of the Family Trust (lender) and SMSF (borrower)
  • To be the directors and shareholders of the bare trustee
  • The only members of the SMSF;
  • Objects of the Family Trust; and
  • Said to control the Family Trust


4. Greater Income Generated

The final requirement of s 295-550(5) is that the amount of income derived is more than the amount that might have been expected to be derived if the parties were dealing at arm’s length.

This position is stated as clear by the ATO, in that either the income would be nil (as they might not be able to obtain a loan if not for the related party) or lower, because of the net effect of the charge of greater interest.



Relevantly, the ATO does not hold that the above scenario represents a contribution to the SMSF.

This Ruling serves as a warning that any LRBA must be considered carefully, not just in light of the specific rules contained in ss 67A and 67B of the SIS Act, but also in light of Part IVA of the ITAA97.

Posted in: Tax & ATO News Australia at 01 July 14

The proposed ATO power to make up its own rules is scary

The Commonwealth Government has established a working group to examine whether the ATO should have a “remedial power” to allow the ATO to fix up any technical problems with the legislation.


As the Secretary assisting the Treasurer, Steven Ciobo MP, said in a recent speech, the goal of this remedial power is to


“...provide a mechanism for resolving unintended and anomalous outcomes in the tax law more quickly than is possible through legislative amendment.”


In other words, where the legislation as passed by the government appears to be wrong, the ATO has the power to fix it up, without going back to the legislature.


This is a seemingly simple and sensible change, but unless strict controls are put in place, it has the power to be misused and create massive uncertainty amongst taxpayers, and their accountants, financial planners and lawyers.


It is easy to think of many situations where the legislation as passed appears unfair.  A common example is the connected entity test for small business concessions, which can unfairly increase a person’s net assets for the purpose of calculating whether or not they exceed the threshold.  It would make sense to allow the ATO to fix up this test, but that would entail the ATO working out whether or not the legislature intended the test to work in a particular way.  The result would be greater uncertainty, not less.


Even more concerning is what would happen if the ATO thought that the tax laws should be tougher, not easier on a tax payer?  Could the ATO actually increase a taxpayer’s exposure to tax based on its view of what was intended, without our elected parliament having a say?


In my view, it is the ATO’s job to enforce the law, not write it.  If laws are wrong – get them changed by all means, but do it in parliament whose members are answerable to the people.  No ATO officer will be held directly to account if they get this wrong.  I am no constitutional expert, but to me this proposal appears to offend the basic concept of separation of powers.


Hopefully, consultation is widespread and meaningful and as many people as possible take the opportunity to reject these changes, or constrain the changes to administrative matters only and then only where the interpretation is favourable to taxpayers and not the ATO.

Posted in: Tax & ATO News Australia at 31 March 14

"Reinventing the ATO"

On 27 March, the Commissioner of Taxation addressed the Tax Institute of Australia 29thNational Convention in Hobart.


His speech emphasises the transformational changes the ATO has embarked on to become ‘a leading taxation and superannuation administration known for contemporary service, expertise and integrity.’


The speech can be accessed here.

Posted in: Tax & ATO News Australia at 31 March 14

Exchange rate gains and losses

With the rise of (and falls in) digital currencies, such as Bitcoin, regulators, including the ATO, have announced they’ve turned on the spotlight.


Assuming the ATO treats Bitcoin, and other digital currencies, similarly as other foreign currency, the application of the Division 775 foreign exchange gains and losses rules in the Income Tax Assessment Act 1997 could mean substantial increases in income or available deductions resulting from the trade of highly volatile digital currencies.


In short, foreign exchange gains or losses resulting from change in value of a currency (“forex realisation gain” and “forex realisation loss”) are treated as assessable income or deductible.


A simple example of a forex realisation gain is where you dispose of a foreign currency for more than what you paid for it attributable to an increase in the value of the currency.


However, where the gain or loss resulting from the fluctuation in the currency value is not realised, there will be no forex realisation gain or forex realisation loss.


For example, on disposal of a foreign capital asset, on translation into Australian dollars, a capital gain or loss may arise. That capital gain or loss is worked out using the exchange rate at the time of acquisition for the purposes of calculating the cost base, and the exchange rate at the time of disposal for the purposes of calculating the capital proceeds. To work out the effect the exchange rate had on the capital gain or loss, use only the exchange rate at the time of disposal to work out the gain or loss.


The difference is the amount to be included as income or that is available as a deduction, unless it does not contribute to the realised gain or loss.


For example, if, on the disposal you make a capital gain attributable to the increase in value of the asset, but actually make a loss because the foreign currency has dropped in value, the ATO will not allow that net loss as a deduction.


There is also a rule that if 12 months have not passed since acquiring an asset and the disposal of it, including the due date for payment, a forex realisation gain or forex realisation loss will not be treated as assessable or deductible, but rather will be treated as a capital gain or loss. An election can be made out of this 12 month exception.

Posted in: Tax & ATO News Australia at 26 February 14

ATO communication improving? Fingers crossed.

I recently attended a meeting between a number of ATO officers and representatives from the legal profession around Australia.  The meeting was billed as a high level communication exercise, as the ATO is eager to improve relationships with lawyers generally.

Surprisingly, the meeting was very positive.  Representatives of the ATO, right up to the Assistant and Deputy Commissioner level appeared genuinely committed to a new process.  Hopefully this will translate into real changes on the ground.  From past experience, this has not happened.


One of the major focuses over the next twelve months for the ATO is debt disputes (that is, where debt matters end up in court for recovery action).  I raised as some length my experiences, some of which I have shared previously, of debt recovery matters where there is a real dispute that the tax debt is wrong and there are appeals on foot.  The ATO (at a high level) were adamant that the ATO did not take debt recovery action when there was a genuine appeal. 


I told them they were wrong and gave an example of a taxpayer who sold her house at the height of the GFC because of the pressure she was under from the ATO debt collection department.  She not only had lodged an appeal, but we eventually won with all assessments set aside.  This was cold comfort to her, as she had lost a fortune selling her house in a fire sale in a depressed market.


The ATO is keen to hear more examples of these sort of thing happening.  Hopefully they are genuine.  I hope to bombard them with examples.  I have several, but I am hoping that if anyone has a story of debt collection gone horrible wrong, that they could share it with me (anonymously) so that I can start to collate some feedback from the ATO.


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Posted in: Tax & ATO News Australia at 24 February 14

High Court Case helps determine questions of facts vs. questions of law in AAT hearings

The ATO has recently released a decision impact statement on a High Court tax case that SMH Tax Lawyers won last year, Commissioner of Taxation v Crown Insurance Limited.


The ATO concluded that this case has no precedential value and is confined to its facts (which begs the question as to why they wasted tax payers money and that of our client pursuing the matter through to the High Court and losing), but we respectfully disagree.
Quite aside from clarifying issues regarding the source of overseas income, this case was very important in helping to determine what matters are questions of facts (and therefore not able to be appealed to the Federal Court after an Administrative Appeals Tribunal decision) and what are questions of law (and therefore can be appealed).
This question is at the heart of very many appeals from the AAT.
It also emphasises how important it is to present the facts in a clear, concise and compelling matter in AAT hearings.  If you do not get the facts right in AAT hearings (which the vast majority of taxpayers do not), then your chances of losing are very high and your chances of successfully appealing are negligible.
At SMH Tax Lawyers one of our most critical specialist roles is helping our clients present the facts properly.  This is something we are uniquely placed to assist with as lawyers with specialist litigation and tax experience and the resources to work with our clients in forensically examining complicated facts which can cover many years, and often many countries.
With this assistance, our clients have achieved highly successful results in tax litigation matters against the ATO.

Posted in: Tax & ATO News Australia at 24 January 14

How the Qld Office of State Revenue's powers can affect business owners

Last week the Qld State Government announced a change at the top of the Office of State Revenue, which is responsible for collecting state taxes like stamp duty, land tax and payroll tax.  The new Commissioner, Ms Elizabeth Goli, was until recently a Senior Assistant Commissioner in the Australian Taxation Office’s indirect taxation section.


Perhaps what is most interesting is the wording of the State Government’s announcement, which appears to foreshadow an even more aggressive tax collection approach from the Office of State Revenue under the cover of paying down debt.
Given that the Qld Office of State Revenue has perhaps the most extensive collection powers of any authority in Australia (including the ATO), this should make Qld business owners very, very worried.  Many people are not aware that the Qld Office of State Revenue has these powers which include:
• The ability to issue assessments based on their belief of a particular state of affairs, and not on hard evidence – as with the ATO, the Office of State Revenue can accuse you of underpaying state taxes and you are guilty until you prove yourself innocent.
• The ability to use extensive collection powers, such as accessing your bank accounts and forcing your debtors to pay the government instead of you (garnishee powers).
• The ability to recover from a wide range of other companies which may be deemed to be grouped with your company under the extensive grouping powers in the payroll tax legislation.
• Requiring you to pay the alleged debt in full prior to commencing appeal proceedings in either the Qld Supreme Court or the Qld Civil and Administrative Tribunal (QCAT).
SMH Tax Lawyers has had extensive and recent experience against the Qld Office of State Revenue – particularly in the area of payroll tax and land tax disputes. The payroll tax laws are particularly complex and difficult for small and medium sized businesses to administer. If the new Commissioner heralds an increase in the activities of the Office of State Revenue, we anticipate that there will be a lot more litigation in the area of payroll tax.

Posted in: Tax & ATO News Australia at 14 January 14

ATO targets discretionary trust partnerships

On 22 November 2013 the ATO released Taxpayer Alert TA 2013/3 “Purported alienation of income through discretionary trust partners”. The ATO is targeting, in particular, accountancy, legal, and other professional practices that operate as partnerships of discretionary trusts. This ATO alert flags an attack by the ATO on basic business structures under the guise of tax avoidance.


The ATO are looking for income splitting schemes where income of individuals attributable to their professional services is alienated to a trust. Of course, there are a number of hurdles to jump before the law can effectively attribute income distributed by a partnered discretionary trust to just one individual.
Firstly, individuals in a professional practice do not generate personal services income, but rather the practice generates the income. Secondly, even where there are individuals generating personal services income, the partnership will be a personal services business where a number of individuals are generating personal services income from a number of unrelated clients. This effectively prevents the partnership’s income being attributed to individuals.
If all else fails, the ATO have raised the possibility of applying Part IVA. Presumably, the Part IVA argument would be that if not for the partnership being made up of discretionary trusts, then more income would be attributable to what would otherwise be individual partners who would individually be liable to pay more tax, and, as such, the structure is a tax avoidance scheme.
The example provided in the alert compares the tax paid by three individual partners who each derived $500,000 in income from the partnership to a scenario where three partnered discretionary trusts distribute to two beneficiaries amounts of $50,000, to four beneficiaries amounts of $80,000, to another $450,000, one trust receives $350,000 but has at least an equal amount in losses, and an unidentified amount is distributed to a non-lodging corporate beneficiary. The resulting tax collected in both scenarios is then compared showing that overall more tax can be collected where three individual partners pay tax on $500,000 compared to where seven beneficiaries pay tax on lesser amounts, one beneficiary doesn’t lodge, one trust has losses, and the net profit or loss of the other two trusts remains a mystery.
With reference to the ATO’s example, it is not, as suggested by the ATO, a given that less tax is collected in the latter scenario. And then to confidently say that the arrangement is a tax avoidance scheme would require showing that the arrangement makes no sense other than to split income through trusts that would otherwise clearly be attributable to an individual or individuals, thereby reducing individual tax, while the tax consequences to the trusts and other beneficiaries pale in significance.
In theory, the ATO could take the same approach to corporate structures under Part IVA.
The other issue for the ATO is the capital gains tax consequences of an individual partner assigning his or her interest to a trust. The ATO is concerned that little, if any, CGT will be collected if individual partners are eligible to claim CGT concessions on the assignment of their partnership interest.
The ATO advises that it will look at partnered discretionary trusts in the 2013/14 and later years.

Posted in: Tax & ATO News Australia at 26 November 13


Tax & ATO News Australia

Author: David Hughes

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